Tax Law Changes Weighing On Housing

Earlier this week, S&P/Case-Shiller home price indices for the month of December were released. We discussed them in detail in our Chart of the Day on Tuesday. We made three key observations.

First, we noted that seasonally adjusted Case-Shiller home prices tend to exhibit some residual seasonally. After re-seasonal adjustment, we can see monthly price changes. That leads to a second observation: home prices have slowed considerably from annual rates north of 6% in mid-2018 to more like 3% today, though no month has seen home prices either decline or rise slower than inflation.

Finally, a third observation: capped deductions on state and local taxes (part of the tax cuts passed at the end of 2017) seem to be having a significant impact on home prices. As shown in the chart below, metro areas with high tax rates have seen home price growth much lower on average than metros with low tax rates. It seems clear that the Tax Cuts and Jobs Act (TCJA) is having a material impact on the price appreciation of homes in areas where homeowners can no longer deduct as much of their state and local taxes.

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